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A Crimson Tax Tide

Mises Daily: Thursday, June 21, 2012 by

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If you ever visited my part of the country, you would likely hear about a long-standing controversy over occupational taxes and the right of my state's most populous county to impose them.

That state would be Alabama, and that county would be Jefferson County, established through violent, extramarket means in 1819 yet named for an antitax radical who eventually became the third president of the United States. Although Thomas Jefferson would die five years later, his eponymous county is still with us.

As a county, Jefferson was, thankfully, unremarkable throughout most of its history. It was not until the 1950s when the county made international news for its boorish enforcement of state-mandated, public segregation. The county has paid a severe economic price for those episodes. In 1960, Birmingham, Alabama, was similar in size and socioeconomic characteristics to Atlanta and could have developed in a comparative manner in the ensuing decades.

But whereas Atlanta nurtured entrepreneurs like Carlyle Fraser, George and Robert Woodruff, Ted Turner, and Oz Nelson and attracted capital and labor from the higher-taxing and regulating northern states, Birmingham became known for Bull Connor and the archpopulism that protected the union-dominated steel industry and generally made capital and labor relatively less secure.

As a result, many long-time JeffCo residents lament what might have been.

This strain of archpopulism brought about the creation of a broad occupational tax to Jefferson County in 1988. Whereas many local tax jurisdictions in the United States impose occupational taxes in the context of cursory licensing fees to business owners (which are bad enough in themselves because they increase the cost of starting a business and hinder the wealth-creation process), JeffCo decided to go further and require occupational tax payments for all workers who were not already subject to existing license fees at the local or state level. The law stated,

It shall be unlawful for any person to engage in or follow any vocation, occupation, calling or profession … within [Jefferson] County on and after the 1st day of January, 1988, without paying license fees to the County for the privilege of engaging in or following such vocation, occupation, calling or profession, which license fees shall be measured by one-half percent (1/2%) of the gross receipts of each such person.[1]

Happy days were here again, at least for those who believe in better living through increased levels of legal plunder. Looking back, however, JeffCo's experience with the occupational tax illustrates Henry Hazlitt's differentiation between good and bad economists. In particular, Hazlitt noted that whereas good economists see the long-term consequences of policies or actions, bad economists focus solely on the immediate effects.[2] The immediate effects of a broadly defined occupational tax have been good for the county in terms of its tax revenue. A new revenue stream was tapped that allowed for new avenues for spending and expanding the number of people who became economically dependent on the county. It also greatly benefited those special interests favored by JeffCo's political leaders.

Over time, the occupational tax grew in importance to the county's general fund. In the last budget year it was in effect, it raised over $70 million, equivalent to one-fourth of the general fund.

Hazlitt would not have been surprised that the long-term effects have proved devastating. Businesses attracted to the region have eschewed Jefferson County for the lower-tax counties adjoining it. Many businesses with a long history in Jefferson County have relocated elsewhere, epitomized by the Red Diamond Coffee Company's 2009 decision to leave Birmingham — where it had been a fixture for over 100 years — for nearby Moody in adjacent St. Clair County. Meanwhile, wealth-creating investment has bypassed Jefferson County for lower-cost venues both in the state and in the southeast in general. Whereas Alabama in general has been successful in attracting investment, this success has bypassed Jefferson County for places like Tuscaloosa (Mercedes), Talladega (Honda), Madison (Toyota and Boeing), and Montgomery (Hyundai) — all of which must be grateful for JeffCo's occupational tax.

In 2011, the Alabama Supreme Court unanimously ruled the tax unconstitutional due to procedural problems with providing public notice of its likely effects. After the county declared the largest municipal bankruptcy in history (based mostly in its inability to pay back monies borrowed earlier to finance a federally ordered sewage system), it commenced the process to reimpose the tax via its legislative delegation to the state legislature. (In Alabama, such county taxes must be approved on the state level.)

What followed was amusing to behold. This past May 9, news leaked out that the head of the Jefferson County Commission had sent an angry, incredulous email to members of the delegation in response to rumors that some of them were actually lobbying for the occupational tax's demise. Once it became obvious that several members of the delegation who supported the tax in public were clandestinely working in the background to defeat it, the legislature never voted on it — essentially allowing it to die.

The basic message of the email was one of shock that lying politicians and internecine squabbles might actually doom the occupational tax and all of the special-interest spending it makes possible, offered in exchange for financial and political support in the future. It's those special interests that gain from the redistributive function of Jefferson County government — through which wealth is forcibly extracted from the productive to be doled out to the politically well connected — who are shocked (shocked!) to find that politics actually brought about the end to their beloved occupational tax.

On the other side of this fight, there are legislators actually opposed to the tax on the basis of (brace yourselves) popular opposition to the tax from constituents inside and outside the county and a desire to force a long-term, postbankruptcy change to the fiscal structure of JeffCo government that does not include an occupational tax. Such a change would make JeffCo more fiscally competitive with Mobile and Madison Counties, both of which have been more successful in attracting capital and generating economic growth and opportunity over the last two decades.

Nonetheless, supporters of the tax and of the interests who benefit from it see this episode as a casus belli. The Birmingham News called the antitax legislators Jefferson County's worst enemies — sort of like a local version of Afghan insurgents? — as if maintaining and tweaking a system that has ended in bankruptcy is in the public interest. The News' John Archibald, a popular columnist, considers the legislators operating outside of the establishment's controls like Fredo Corleone from The Godfather — a traitor the family and eventually killed.

In truth, the controversy has exposed a division between those who want to run the county like it was still 2005 and those who see that the world has changed and are demanding that the county adapt to the times or die. Lost in the huff and puff over traitorous legislators are some very good reasons why Jefferson County should have rid itself of this tax a long time ago.

First, it is a tax. Let's not forget that taxes are involuntary exchanges of income conducted under the threat of legal violence and are therefore inconsistent with the goal of human freedom. Taking others' wealth without their permission is wrong — a violation of natural law. That we have taxes illustrates that most people assent to such takings, and in the case of Jefferson County's occupational tax, this assent lasted for roughly two decades. But there is a tipping point at which the general assent no longer exists, even when the assent is based mostly on a prudent decision to tolerate the tax if only to avoid conflict with government.

Still, thwarting banditry is a positive good, even when the offender is a stationary bandit. To the extent it is thwarted, resources are more likely to be directed to their most highly valued uses, compared to the uses chosen by public officials who spend other people's money.

Second, it is a tax on labor. Here we are in a weak labor market, with historically high unemployment rates mostly explained by discouraged workers' exit from the local labor market over the last three years, and establishment politicians want to reinstate a tax on labor? These are the same "progressive" thinkers who advocate for cigarette taxes to discourage smoking. Why wouldn't taxing labor discourage labor as well?

Third, it penalizes businesses in JeffCo relative to other counties. If you are in a competitive industry committed to operating your business in North Central Alabama, the occupational tax makes Jefferson County less desirable relative to the six counties that border it. The result: Talented JeffCo residents leave for better opportunities elsewhere, while the poor suffer the most. This is no way to position JeffCo as a serious player in the fight for capital flows in a competitive, global economy.

Finally, it allows politicians to put off hard choices for another day. It is long past time for county leaders to examine the costs associated with defined benefit pensions, public-sector unions and public-employee retirement ages, and prevailing-wage laws. Yet, occupational-tax revenue allows them to avoid any serious discussion about these structural issues that may have made sense for the economy of 40 years ago but that today cost the county millions each year.

No wonder they bemoan the occupational tax's demise.

Who doesn't bemoan it? The list is long, but important parties within it include

  • employees who now find their labor supply more affordable
  • entrepreneurs who now can risk more labor-intensive ventures
  • businesses who now find the minimum prices they require to cover their costs have fallen, and
  • consumers who now find lower prices and increased purchasing power.

All of whom would agree with this paraphrase of Thomas Jefferson: a little tax rebellion, now and then, is a good thing.

Notes

[1] Jefferson County, Ala., Ordinance 1120, § 2 (Sept. 29, 1987).

[2] From Chapter 1 of Hazlitt's classic Economics in One Lesson (Auburn, Alabama: Ludwig von Mises Institute, 2008), p. 4:

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.